Tax credits, at both the federal and state levels, directly offset an individual or business’ tax bill for the year. Tax credits are often part of a package deal when it comes to policymaking: tax deductions, tax incentives, and tax “breaks” are all closely associated with tax credits. It is often counterintuitive to think that lowering the tax burden of a business or individual through tax credits is a bad thing; however, as research shows, tax credits (or, on a larger scale, tax incentives), violate the principles of sound tax policy. Instead, policymakers should aim for tax policy that is equitable, simple, and stable. This is beneficial for both taxpayers and government.

This Guide briefly discusses tax policy and provides Alabama policymakers with a framework for making tax policy decisions that ensure fair and stable tax revenue for the state, as well as a minimal impact on families and businesses.

Issue Snapshot:

—Tax credits, at both the federal and state levels, directly offset an individual or business’ tax bill for the year.

—As research shows, tax credits (or, on a larger scale, tax incentives), violate the principles of sound tax policy.

—Instead, policymakers should aim for tax policy that is equitable, simple, and stable. This is beneficial for both taxpayers and government.

Recommendations:

—To eliminate tax credits without further harming individuals and businesses’ bottom lines, state and local tax rates should be lowered and applied to a broader taxpayer base.

—Alabama policymakers should consider simplifying the tax code and providing an attractive tax regime for all businesses looking to locate here.

—If tax incentives must be offered, which they currently are, Alabama must establish reporting requirements. This increases transparency in the tax code.

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